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Morning Briefing for pub, restaurant and food wervice operators

Fri 16th Sep 2022 - Friday Opinion
Subjects: Taking showing sports to the next level, future sales and profitability, consumer spending in the cost-of-living crisis 
Authors: Glynn Davis, Paul Pavli, Simon Stenning

Taking showing sports to the next level by Glynn Davis

While sitting at the long bar of the Torch & Crown brewpub in New York City earlier this year, I received a message from a friend asking if I was watching that night’s big American football match. I glanced upwards and saw the game was playing away on one of the bar’s many screens. I had been completely oblivious to its presence as I enjoyed my beer, which highlights just how well integrated the showing of sport within myriad bars is across the US. It’s a staple of the leisure scene in America.
This has definitely not been the case in the UK, despite our love of sport and the demand for pubs and bars to offer something more than just a place for people to eat and drink. Sport in pubs has largely involved a few screens scattered around the room, which typically show the major football matches and attract a load of blokes who gain great pleasure from shouting at the referee. There are exceptions, of course, such as the Famous Three Kings in West London, but they are something of a rarity.
The scene in the new Goldwood Sports Pub and Kitchen in the City of London could not be further removed from the traditional old-school sports pub. After entering under a green awning, customers are met by an expansive 9,000 square feet of trading space spread across two floors that can handle up to 500 people. Within the high quality fit-out are 19 cutting edge screens that are located to ensure customers have what the pub’s general manager Zach Potter calls “360 degree visuals”.
Although the venue has been created to offer a premium environment for dining, drinking and holding business meetings, the sport element is clearly the main driver of custom, with 80% of visitors choosing the Goldwood over other venues because of its live screenings of a great variety of sport – including football, rugby, cricket, F1, golf, tennis and US sports. Interestingly, horse racing has its own dedicated ‘Racing Corner’ with races shown throughout the day.
This gleaming next generation sports bar is merely the latest offering from ETM Group and its sister company, Maven Leisure, that have been very quietly building a portfolio of sports bars that put all others in the shade. Goldwood joins Greenwood, Westwood, Redwood and the Long Arm Brewery (they ran out of woods) sites taking the showing of sport to a new level. Such has been the success of the model that the company is looking to open a couple more venues over the next year.
Integral to their success is the full commitment the company has made to showing sport. The £1m fit-out includes three 100-inch hi-res screens costing £15,000 each, and there are the ongoing costs of needing four satellite boxes if you want to show sports from the likes of Sky and BT. Potter reckons delivering sport to the comprehensive level required today means you have to go all in or maybe not bother at all.  
This is not the universal thinking though, because a few miles away in north London is the newly opened Valderrama’s, which has been created by renowned chef James Cochran in a space that’s a fraction of the size of the Goldwood. He describes it as the sports bar he has “been searching for my whole life”. The brightly decorated space, and a female focus that shifts it away from being wedded to showing footfall for a largely male audience, certainly makes it stand out from the traditional sports boozer pack. Since its opening, it has been helped by the incredible performances of the England women’s football team, and on my visit, former international player turned TV presenter Alex Scott was doing some promo photos for the venue. 
Not surprisingly, a variety of screens are situated around the bar showing various sports including football, tennis and F1. But Valderrama’s is not just about a commitment to sport, because Cochrane has given his celebrated fried chicken brand, Around the Cluck, a permanent home at the bar. Judging by the feedback so far, the enticing menu appears to be as much of a draw at Valderrama’s as the live sport.
But then, this is not too dissimilar to what you would see in the US, because no self-respecting sports fan would visit their local bar to watch the night’s big game without complementing the experience with some high quality bar food. The British sports bar might well be gradually moving away from its traditional roots, and in doing so, successfully attracting a new audience. 
Glynn Davis is a leading commentator on retail trends

Future sales and profitability by Paul Pavli

The summer may have been sunny and bright, but the news has been full of doom and gloom, with daily reminders of the cost-of-living crisis facing both businesses and households. And the long-term forecast isn’t any rosier, with no respite in sight as things are predicted to get a lot worse before they get better.

In my professional capacity, I have been keen to understand how this turbulent climate is impacting hospitality businesses in terms of sales (although that is very hard to gauge right now), cost increases, staff concerns and, ultimately, profitability, which everyone depends on to stay in business.
I recently carried out a piece of work with 18 pub and restaurant businesses – a mix of 384 wet-only and food focused venues – to better understand the current issues and look closer at the impact these are having on their operations. 
These businesses supplied me with the data on current like for like sales, food and drinks cost increases into their business, staffing cost increases and, finally, their estimated utility cost increases based on new contracts this year. The results were eye watering, but nothing you haven’t seen in other articles.
• Sales like-for-likes running at +8.1% for the group on average (Propel reported circa 4% for July 2022 recently)

• Staff costs increases of 4.3% on average (but higher in businesses with a food offer)

• Food cost increases of 7.1% (which is lower than the +13% from the CGA and Food Prestige data)

• Drink cost increases of 4%, but higher in the wet-only businesses

• And energy costs for the group up 84%, which while almost double pre-inflationary costs, is much less than I am seeing out there right now. The energy price rises for these businesses ranges from 0% for those still locked into a deal up to as much as up 250% for one, 3.5 times more!

On an almost daily basis, we read in our daily industry newsfeeds like for like sales numbers for businesses in the sector, and those reports range from exceptional performances for a few of the top operators to small single digit growth for the majority. Unfortunately, on the back of the huge increases we are seeing in costs, this is having a serious dent on profitability, if in fact they are making a profit.
Looking at the “real live” data from the 18 businesses I mentioned above, for a pub/restaurant with 60% food/40% wet split, profitability has taken a big hit. On the assumption that most operators can pass on all the food and drinks costs increases to their consumers (and that’s a big if) but have to absorb all other cost increases, they need to find an additional 19% sales growth (29% sales growth if you include the increases already made) just to stand still on 2019 outlet profitability. A business that was converting outlet profit at circa 16% flowthrough before these cost increases is now at circa 6%, this being for a site taking £20,000 net a week.
For a tied wet-only pub that is taking anything less than £7,000 to £8,000 a week (and there are lots of those), it doesn’t make a profit unless the rent is heavily discounted, which it could be if the landlord is a pub company, but won’t be for many independent operators. For these businesses, again assuming they can pass on all their drinks cost increase to consumers, they still need to find an additional 10% sales growth.
The numbers for sales growth needed to return or remain at 2019 profitability levels would be hard to achieve in good times, but we are about to see the biggest squeeze on consumer spending in 40 years. So, for many of these businesses, it’s not about a return to 2019 profit levels, it’s about the short game of remaining profitable to live to fight another day.
Businesses need to be forensic about what they are charging customers. I’m not saying be cheap, but more than ever, it must feel like value for money to keep them onboard and onside. With autumn now here, the reality of doubling fuel costs is going to bite, with consumers feeling the pinch in their pocket more than ever. If hospitality businesses push prices too high, we risk not only losing that consumer from the individual venue, but also from the sector. What I mean by this is if someone has £40 to spend in the pub (or other hospitality venue) every week, on say two £20 nights out, and the first night out becomes £27, the £13 left will become a takeaway rather than a night in the pub.
It’s forecast that total revenue for the sector will return to pre-covid levels by 2023 (with less venues open), but unless costs come down dramatically over the next 12-18 months, many will have to rethink their business metrics. Many businesses are now running on cash reserves or trading week to week, trying to weather the storm with zero support from the government. 
This lack of support means, in some respects, 2022 is proving worse for many businesses financially than 2020/21 (which was bad). In today’s climate, many businesses are trying to fathom how to trade profitably while doing their best to deliver as good a consumer experience as they can, with the resources and staff that they have right now. From a consumer’s perspective, they are starting to get frustrated with the issues we have in the sector, and they are less forgiving than they were when we reopened after the various lockdowns.
To get through these turbulent times, future planning is critical. However, I often hear businesses say they can’t plan because it’s so uncertain right now, and it will just be guesswork. I think that’s the point. All budgets, even in more certain times, are a guess of some description or other. In those more certain times, we have more robust data to look back on and use in future planning scenarios. Unfortunately, this is something we don’t have the luxury of right now, as the past two years have been so unstable and unprecedented.
However, in my opinion, all businesses – including single site operators – should be working on at least a couple of scenarios right now. Sales are probably the easiest metric to forecast, and then the others costs that the business needs to operate should be forecast for the next 18-24 months. If the current like for like sales and the cost lines remain unchanged, what will the profit look like by this time next year? And if that profit number is actually a profit loss, how much of the cash reserve will be eaten away, and how much more cash will the business need for it to remain liquid? 
The questions I would be asking are:
• How much profit will the business deliver with the current metrics over the next year?
• What happens if costs (let’s say energy) increase by X% this year?

• How much rent can I afford to pay on these numbers, and should I discuss this with my landlord (most should listen if you have a robust forecast)?

• Can I afford the debt repayments I have right now, or do I need to speak to the bank before they call me, to extend repayments or even delay them?

• How much cash does the business need to stay liquid until this time in 2024?

If you have these covered, I’d be asking how your business can exploit the current situation for long term growth, maybe through acquisition, or how it can engage better with your consumers, gaining even more loyalty from them – something that’s going to be crucial over the coming years. It’s not going to be easy, but it is possible to survive and even thrive. We are a very resilient sector, and the sector will recover, it always does. You just need to do everything in your control to make sure your business is one of those that does.
Paul Pavli is managing director at Paul Pavli Consultancy. This piece first appeared in Premium Opinion

Consumer spending in the cost-of-living crisis by Simon Stenning

The media headlines are frightening when all that anyone can talk about is the cost-of-living crisis, and undoubtedly there are worrying times ahead for the UK economy and for the foodservice/hospitality industry, especially for operators facing rising energy bills. However, it is not all doom and gloom. There is support from the government coming, and there are signs that the industry will survive, if not exactly thrive.

We built rising inflation into our forecasts for 2022 and 2023 in our FutureFoodservice report from March 2021, and I’ve been talking about the reality of inflation on consumer spending since April this year, but still some realities are concerning – especially when headlines are taken at face value.
For example, the Office for National Statistics (ONS) details average household income for 2021 as being at £31,500, and from that, the average annual discretionary spend on eating out (restaurants and hotels) sits at £2,750. If we then take inflationary increases in fuel, energy and grocery, which are approximately +£450, +£700 and +£250, respectively per household, then this adds up to circa £1,400, which is 50% of the discretionary spend on eating out. And those figures were calculated in April, when the energy price cap had increased to £2,000, so it could become far worse.

However, these are averages, and there are significant ranges in between. A Retail Economics income tracker from April split the population into least affluent, middle income and most affluent, and this showed that the most affluent were barely affected by inflation, while the least affluent were 5% worse off after earnings growth was taken into account. The Centre for Economics and Business Research (CEBR) calculated that the top ten percentiles of earners in the UK have seen incomes rise by 6% to 10% in the first half of 2022.
If the ONS figures are taken at face value, and the discretionary spend on eating out is reduced by £1,400, then the industry would lose half its value. But of course, it hasn’t, and it won’t. Consumers will find a way to switch spend from purchases that aren’t critical to those things that they want to hang on to – hence Amazon Prime and Netflix losing significant numbers of subscribers.
In the same way that averages don’t tell the whole story, consumer surveys must not be taken at face value, as they might say one thing, but it doesn’t mean that they do it. A recent survey in The Times of 1,767 UK Adults in the week of 8 August asked consumers what they had done in the past six months to save money. In that survey, 50% of respondents said they had cut back on how much they ate out. If that were the case, then why would the Coffer CGA Business Tracker show sales from their cohort growing at 6%? Had the other 50% dramatically increased their eating out?

So, we can expect some consumers to cut back on their discretionary spending in the face of inflation not keeping pace with wage growth, but it doesn’t mean that everyone does. Those consumers who sit in the lower percentiles of earnings do not tend to be high participants in eating and drinking out, so we won’t see huge decreases in hospitality from their spend.
There is also significant targeted support from the government (as announced in May). The package of government support includes £400 for every household to reduce electricity bills, £650 in cost-of-living payments for eight million households who are on some form of benefits including Universal Credit, £150 for six million disabled people, £150 rebate on council tax for 23 million households in bands A to D, and an additional £300 for eight million pensioner households on top of their existing winter fuel payments.
And we have to expect more support from the government to deal with the increase in energy cap from October, on top of the support detailed above. While this will be great for consumers and will help protect their discretionary spend, which in turn will help the economy to remain stable, it is critical that the government also support business with energy costs. There’s no point giving consumers support if they start losing their jobs through business failures and closures.
We are forecasting that inflation will start decreasing from the second quarter of 2023, and indeed, we may see some drops in the component parts of inflation before the end of this year. Energy and fuel costs are the most significant drivers of inflation rises, and yet wholesale fuel costs have already started falling as more oil production comes on stream. The wholesale cost for petrol has fallen to £1.34 per litre in August from £1.55 in June, so ONS inflation figures for August will reflect that. Also, whatever support the government provides for the energy cost increases from October may well be taken into account by the ONS when calculating inflation, and that could bring down the headline figure.
Regardless of what ONS figures declare, and whatever the mainstream media headlines say, there are challenges ahead, but we forecast that consumer spending will remain resilient over the next year. Yes, mortgage costs are increasing, and that will impact many households who have been used to cheap money for so long. However, the amount of savings built up over the pandemic is still significant and will drip feed into the economy over the next few years. We are also seeing an increase in household credit card debt as consumers protect their spending habits through credit cards.
Our forecasts have been for greater polarisation between value-driven social refuelling and experiential, premiumised dining, and this is a feature that will continue through the next 12-18 months. By way of example, in the value sector, Greggs saw 12% like for like growth versus 2019 in the last four weeks to the end of June, while at the other end of the spectrum, London hotels have seen their highest level of average room rate ever and have occupancy levels only 7% below 2019, despite inbound tourism levels circa 45% lower than 2019.
But the middle ground is going to get quite tricky. Either prices have to go up to allow operators to survive cost increases – but that can turn off consumer frequency, and operators have to improve the experience in order to justify charging more – or you’ve got to consider discounting and promotions to maintain frequency and footfall.
From a trade perspective, the fourth quarter of this year will be supported by the football World Cup, although pubs will really need to concentrate on delivering a great experience that can’t be replicated at home. Christmas 2022 ought to be better than December 2021, through some pent-up demand resulting from cancelled events last year, and with employers seeking to look after their staff. However, the first quarter of 2023 will be very tough as consumers get hit by higher energy costs, unless there is significant government intervention.
Ultimately, we shouldn’t be totally pessimistic as consumers’ innate desire to socialise will remain strong. Indeed, consumers may well deflect other problems through going out and socialising. Those consumers that aren’t so badly affected will continue to go out, while those more affected will trade down or reduce frequency. It’s not all doom and gloom, it’s just going to be bloody difficult.
Simon Stenning is founder of FutureFoodService, a forecasting and strategic advisory service for the foodservice/hospitality industry. This piece first appeared in Premium Opinion

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